Matthews Asia Country Updates

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For the month ending May 2018

China/Hong Kong

In May, the MSCI China Index returned 1.81% and Hong Kong's Hang Seng Index returned -0.44%, both in local currency terms. China's domestic CSI300, the A share index, returned 1.46% in local currency terms (0.31% in U.S. dollar terms). The renminbi (RMB) ended the month at 6.41 against the U.S. dollar.

Chinese equities were mixed in May with the MSCI China stocks outperforming local A-shares. Unresolved trade issues pressured shares and contributed to increased volatility. Anecdotal news flow implies that both the U.S. and China are open to a reasonable resolution to the trade dispute—although investors seem keen to wait for the final outcome as few participants expect a smooth resolution. On a positive note, the long awaited inclusion of China A-shares into the MSCI China Index begins on June 1, 2018. Initially, 233 A-share companies will be added to the MSCI China Index, representing approximately 2.4% of the index weight and less than 0.8% of the MSCI Emerging Markets Equity Index. These weights could step up meaningfully over time as the initial inclusion represents only 5% of the total anticipated addition. The new A-share universe provides broader access to consumption-related stocks, banks, industrials and information technology.
For more on China, please read the latest issue of Sinology.


In May, the S&P Bombay Stock Exchange 100 Index returned -1.96% in U.S. dollar terms (-0.82% in local currency terms).

Indian stocks were weak in May and have lagged behind global emerging markets in 2018. A more sanguine environment for corporate earnings was offset by macro concerns. More recently, investors have become concerned with India's dependence on oil as energy prices have risen through budgeted levels. India's current account has suffered and the Indian rupee has weakened. Politics remain an outside risk as the ruling coalition is slowly losing seats in the general assembly and President Modi is up for re-election in 2019. Corporate earnings seem to indicate a generally improving economy. In fact, the latest GDP growth release by the government pointed to the Indian economy growing at 7.7% in Q1 2018—the highest level in seven quarters. Another positive is that recent market weakness has driven valuations of Indian equities more toward their long term averages, which should support prices as the macro environment stabilizes.


In May, the Tokyo Stock Price Index returned -1.67% in local currency terms (-1.36% in U.S. dollar terms). The yen ended the month at 108.74 against the U.S. dollar.

Japanese index returns were slightly negative in May. Japanese equities were plagued by several concerns including global trade tensions and continued political noise related to Prime Minister Abe (and his cabinet's deteriorating approval rating). In addition, consensus earnings growth seems to have softened a bit as strong fiscal year 2018 earnings growth has become a formidable high-bar to surpass. As a result, foreigners have been net sellers of Japanese equities in 2018. However, going forward, we expect that the marginal demand for shares to come from continued corporate buybacks, relatively attractive valuations and the Bank of Japan's (BOJ) purchases of ETFs. In addition, the domestic economy continues to benefit from stronger exports (especially toward China) and a tight labor market supporting reasonable wage growth and domestic consumption.

South Korea 

In May, the Korea Composite Stock Price Index (KOSPI) returned -4.74% in U.S. dollar terms (-3.67% in local currency terms). The Korean won declined by -0.89% against the U.S. dollar.

South Korea's equities were among the region's weakest in May as investors contemplated how trade talks between the U.S., China and Europe could affect Korean exports and how prospects of a potentially significant hike in the country's minimum wage could affect corporate earnings. In addition, geopolitical worries surrounding the “on again/off again” talks between the U.S. and North Korea kept investors on the sidelines during May. South Korea's domestic economy remains stable and the country's exports continue to support GDP growth given the current up-cycle in global technology demand — especially in semiconductors. Market participants expect a very gradual increase in South Korean policy rates, highlighting muted inflationary pressures and steady economic growth.

Southeast Asia

In May, the broader MSCI ASEAN index fell -5.23% due to weaker appetite for global emerging market assets as the U.S. dollar gained ground during the month.

Malaysia's KLCI index fell -8.17% (and -6.8% in local currency terms). Pakatan Harapan (PH) won the 14th General Election led by 92-year-old Mahathir Mohamad, unseating the Barisan Nasional coalition led by Najib Razak that had held power for 61 years. First 100 days action pledges have seen the replacement of the unpopular Goods and Services Tax (GST), with the prior Sales and Services Tax (SST), reinstated fuel subsidies, increasing social expenditures and a review of all major public projects including the East Coast Rail Link and the SG-KL high speed rail, as well as the country's relationship with China. While higher oil revenues and potential savings from realized efficiencies within the civil service sector could fund the budget, questions remain about the sustainability of Malaysia's fiscal position. That said, removal of GST and the reinstatement of SST in September should boost domestic consumption in the second quarter.
Indonesia's Jakarta Composite Index ended the month 0.58% higher in U.S dollar terms (and 0.63% in local currency terms) after the market jumped higher following dovish Fed minutes released in the last week of the month. In May, Perry Warjiyo, the new Indonesia central bank governor, was sworn in and raised policy rates by 50 basis points to 4.75%, stamping out market concerns surrounding pressure on real interest rate differentials and vulnerability from a current account deficit. Foreign positioning in equities have lightened following outflows of almost US$3 billion so far this year and the market is trading at more reasonable valuations of 15x. Looking further out, to offset the drag of higher interest rates, Bank Indonesia may look at other measures such as relaxing loan-to-value ratios aimed at supporting growth. Regional elections on June 27, 2018, along with Ramadan seasoning spending should see greater domestic activity in the second quarter.
Philippines PSEi index dropped -5.72% (-3.9% in local currency terms) around concerns of an overheating economy. Inflation had risen from higher oil and food prices and with the central bank being seen behind the curve on monetary policy caused equities to de-rate. The Bangko Sentral ng Pilipinas (BSP) recently raised rates by 25 basis points to 3.25%. Recent headlines of the regional wage board petitioning for a +47% increase1 in the minimum wage will add to inflationary concerns. The eventual increase will likely be much less. That said, there could be a more hawkish policy response at the next policy meeting.

Sources: Bloomberg unless otherwise noted

1 Philippine Daily Inquirer; May 29, 2018

The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.